Forex Daily Market - : Oil remains bid this morning

Today's Talking Point

Oil update

Analysis: Oil remains bid this morning with Brent closing in on the $80 per barrel handle ahead of today's OPEC+ meeting, where it is widely expected to announce another 400k increase in production. The cartel has cut its estimates for an expected first-quarter surplus as demand has remained relatively robust, while there have been some supply disruptions in Libya. OPEC's joint technical committee sees a surplus of 1.4mn barrels a day for Q1, a cut of roughly 25% compared to its prior estimates. This will allow OPEC to continue with its gradual increase in production without destroying the high prices needed to keep many members of the cartel happy by supporting their government's books. The announcement shouldn't be too market-moving, given that it is already priced in. As we noted yesterday, market pricing remains bullish for oil, with Brent's prompt timespread in backwardation at around 45cents currently. This spread has widened out from a week ago, and has reversed the brief drip into contango seen before the Christmas period. The spot versus 3-month future spread has also widened out to its highest since the start of December at almost $1.40, after reaching lows of $0.50 per barrel in mid-December.

Rand Update

Trade in the first session of 2022 was driven by themes that are expected to remain central to financial market flows through H1 of this year. Bets on an early Federal Reserve rate hike despite surging COVID-19 cases abroad drove short-end UST yields higher, in turn supporting the USD against most currencies amid thin liquidity conditions on Monday. However, the ZAR bucked this trend, as it appreciated 0.60% against the broadly-firmer greenback through the session to start the new year off on the front foot.

Beyond the juicy yields SAGBs offer and the ZAR's relative undervaluation on a PPP-adjusted basis, sentiment towards SA is on the mend as its fourth wave of COVID-19 retreats rapidly. Contrasting the narrative of fear surrounding Omicron in most DM economies, the mood in SA is much milder and more optimistic as prevailing data suggest this variant is significantly less virulent despite its high transmissibility. The seven-day moving average of the daily spread rate in SA has dropped to just above 8,000 (from the mid-December peak of over 23,000), while that of the daily fatality rate is currently around 70 (compared to 578 at the peak of the second wave of infections a year ago).

If indeed the spread of Omicron spells the beginning of the end of the pandemic as COVID becomes endemic and the global population learns to live with it through established immunity, the global economy will begin to return to full function through 2022. The currencies of central banks that adopt a more conservative stance and embark on monetary tightening will be rewarded. Many EMs are already well down that road and are establishing attractive spreads over funding economies such as the US, UK, Europe, and Japan. That should lend EM currencies some support in the months ahead, assuming the narrative regarding COVID-19 takes a turn for the better.

Bond Update

The Zondo Commission is set to release the first part of what is expected to be a three-part report today, detailing some of the findings of Zondo's inquiry into state capture. Newswires report that the second part of the report will be released by the end of January and the conclusive last part of the report by the end of February.

The reports will detail opinions on the illegal activities conducted against the state and the people of South Africa through the corruption of state resources, suggesting that there could be further legal action following its release. The Mail and Guardian have reported that "the Zondo commission had broken down its workstreams into six parts: power utility Eskom, logistics firm Transnet, public broadcaster SABC, arms maker Denel, aviation, and the sixth stream for other matters."

There will undoubtedly be some damning evidence presented here. Still, it is an open question what the incumbent president - who will first receive the report - and civil society might do. This could ultimately lead to some political tension insofar as it represents the end of the road for the inquiry and potentially the beginning of criminal charges. Add to this the potential that ex-president Zuma may find himself back in prison because of a questionable parole decision. There is some risk that SA could see another period of social upheaval, as was seen in July 2021.

Download full report